Reconciliation of marginal costing profit and absorption costing profit

RReokeditswe8y ago

The following details have been extracted from the budget papers of LK plc for June 20X3. Selling price per unit $124 Variable production costs per unit $54 Fixed production costs per unit $36 Other variable costs per unit $12 Sales volume 12,500 units Production volume 13,250 units Opening inventory of finished items 980 units If budgeted profit statements were prepared by using absorption costing and then by using marginal costing, A marginal costing profits would be higher by $27,000 B absorption costing profits would be higher by $27,000 C absorption costing profits would be higher by $35,000 D absorption costing profits would be higher by $62,000 Now the way I have understood reconciliations, all I have to do is look at the opening and closing inventories. If opening is greater (Which I believe it is) then the marginal costing profit is higher, however in this question the answer is B. My question is how do they get to B?

C-Cath - CIMA Tutor8y ago#1

Hi there - thanks for the question, We do deal with this in the CIMA P1 notes and video. We remember the saying "SIAM" i.e. when "Stocks Increase Absorption (profit) is More" The difference is the increase in the stock units multiplied by the OAR. so 13250 -12500 = 750 units ... so stocks have increased ( production volume > sales volume) so we know that Absorption costing will be higher of the two profit figures. The difference will be 750 units x Fixed Overhead Rate of $36 = $27000 i.e. answer B is correct. Hope that helps. Kind Regards Cath

RReokeditswe8y ago#2

Hi Cath Thanks for getting back to me. I realise now where I was wrong, I looked at opening and closing inventory instead of production and sale volume. Thanks for the help.

C-Cath - CIMA Tutor8y ago#3

No problem - glad its resolved Kind Regards Cath

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